What is an Accounting Estimate?

An accounting estimate is an approximation of the amount of a business transaction for which there is no precise means of measurement. Estimates are used in accrual basis accounting to make the financial statements more complete, usually to anticipate events that have not yet occurred, but which are considered to be probable. These estimates may be subsequently revised as more information becomes available. Changes in accounting estimates impact the current period and future periods, but have no impact on prior periods.

The amount of an accounting estimate is based on historical evidence and the judgment of the accountant. The basis upon which an accounting estimate is made should be fully documented, in case it is audited at a later date.

Examples of Accounting Estimates

Here are several examples of common accounting estimates:

A loss provision for an environmental damage claim
A loss provision for a bad debt
A loss provision for warranty claims
A loss provision for obsolete inventory
A loss provision for lawsuit losses

The exact nature of the accounting estimates used will depend on the nature of the business. For example, a chemicals plant is more likely to create a loss provision for environmental damage claims, while a consulting firm would be quite unlikely to need such an estimate.